EBITDA | VC Lingo | SOSV – The Accelerator VC

Ehhh…BITDA! Earnings before interest, taxes, depreciation and
amortization. I know this is, this is the VC lingo series – why
the hell are we talking about EBITDA? And you know what, you’re
right. We shouldn’t be. It’s a crazy term that nobody should be
considering in most areas of the venture capital world. By that I mean most technology investing
software and hardware and other things like that. So why is that? So you know, what matters most in funding an early
stage startup company before it’s in the tens of millions or hundreds of
millions in revenue is the basic, basic, basic numbers of what the cashflow of the
business is and what the profitability of the business is. Sometimes referred to as the burn
rate in early stage companies. How much cash are they running
through every month before they become profitable? EBITDA came into play in the 1980s or
so as a way for the private equity firms to leverage up the business
by taking lots of loans and making the argument that they can get
enough loans to cover the depreciation and amortization of some of the capital
equipment if the profit stream is big enough. None of that has
anything to do with startups. So when startups talk about EBITDA,
I’m like, what are they hiding? EBITDA! It could be that what they’re hiding is
that there are large loans that are in the business, that the business is a highly levered
business and maybe that for some businesses is a reasonable
way to run a business. I think it’s very risky in
a venture capital backed
business because most of the times in a venture capital backed
business, it doesn’t have the consistency. It’s not a mature industry where you
can know month after month like a cable business what the churn rate is,
what the infrastructure cost is. These things don’t change
very much, month over month. And so EBITDA becomes a useful
figure in a highly levered, highly leveraged business
requiring a lot of loans. Now any business with which
has venture capital backing, the value of the venture capital is in
the stock of the company and all those loans exist in front of
the value of the stock. So a highly levered business is one in
which the stock is not worth very much until all the loans are paid off. So the founders and anyone else involved
in the cap table of the business – a highly levered bank finance business
is going to have a difficult time justifying the level of
risk of the business. It has to be a very, very
solid and steady, steady, steady business in order for an
EBITDA number to make any sense. So that is just one consideration why
EBITDA really isn’t used very much in most forms of venture capital. EBITDA. Ebit don’t da, don’t EBITDA. Just
talk about cash flow, profits, and those are the two things that you
you need to be concerned about as a founder. Building your profits
and your cash flow. EBITDA! VC lingo…

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